Kriti Gupta

1062
FINANCIAL MARKET AND REGULATORY SYSTEM

CONTINUOUS ASSESSMENT I

TOPIC: CRITICAL ANALYSIS OF SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS)

2015.

INTRODUCTION

The Securities and Exchange Board of India notified the SEBI (Prohibition of Insider Trading
Regulation) 2015 on January 15, 2015, to be effective from May 15, 2015, replacing the two-
decade old insider trading norms in India. The Regulations are based on the recommendations
made by an 18 member committee constituted by SEBI under the chairmanship of Justice
N.K. Sodhi.

Insider Trading Regulations prohibit individuals and entities that have access to unpublished
price sensitive information of the company, from dealing in that companys publically traded
shares.

SALIENT FEATURES AND ANALYSIS OF THE REGULATIONS

1. DEFINITIONS
i) INSIDER1: The Regulations, though have not deviated drastically from the existing
definition under the 1992 Regulations, have strengthened the definition of who an
insider is by expanding the definition of connected person
ii) CONNECTED PERSON2: The definition covers any person who has a connection
with the company that is expected to put him in possession of UPSI. Persons who
do not seemingly occupy any position in a company but are in regular touch with
the company will be covered by this definition.
iii) UNPUBLISHED PRICE SENSITIVE INFORMATION3 AND GENERALLY AVAILABLE
INFORMATION4: Under the 1992 regulations, price sensitive information would
remain unpublished if the information was not published by the company or its
agents. However, that concept has been done away with in these Regulations.
Thus, the criteria to determine what constitutes UPSI is whether the information is
generally available or not under the Regulations. Another key change lies in the

1
Regulation 2(g), SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS) 2015
2
Regulation 2(d),SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS) 2015
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Regulation 2(n), SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS) 2015
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Regulation 2(e), SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS) 2015
 definition of price sensitive information in 1992 Regulation, which now extends to
both a company and securities which is in contradistinction to earlier definition
which had a reference to a company only.
iv) TRADING5: The scope of the definition has been widened to mean and include
subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in
any securities. This has been done keeping in mind the 1992 Regulations, which
prohibits dealing in securities on the basis of material non-public information.
Hence, now even transactions such as creation of security interest or pledging
would come within the scope of trading for the purpose of this Regulation.
v) SECURITIES6: Apart from the plain vanilla securities, more sophisticated
instruments including derivatives, security receipts, any rights or interest in
securities, hybrid instruments apart from units of mutual funds, will now be
covered under this new definition for the purpose of this Regulation.
vi) COMPLIANCE OFFICER7: The Regulations have introduced a definition for a
compliance officer of the company who shall be financially literate and is
capable of appreciating requirements for legal and regulatory compliance under
these Regulations. The Officer shall directly report to the Board of the Company
or the head of the organisation as the case may be.
2. CHARGING PROVISIONS8
i) COMMUNICATION OF UPSI
Prohibition on insider trading consists of following key components:
(a) Prohibition on communication of UPSI by an insider
(b) Prohibition on other persons on procurement of UPSI
(c) Prohibition on trading by an insider while in possession of UPSI.

This is in stark variation with the 1992 Regulations as the 2015 Regulations
restricts communication by insiders and procurement by outsiders of UPSI of a
company or its securities listed or proposed to be listed. The charge of insider
trading will not get attracted in case such communication or procurement is in
furtherance of legitimate purposes, performance of duties or discharge of legal
obligations. However, these restrictions on communication by the Regulations can

5
Regulation 2(l), SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS) 2015
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Regulation 2(i), SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS) 2015
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Regulation 2(c), SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS) 2015
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Regulation 3&4.
 lead to prosecution even on the innocent disclosure of information to any person
who falls within the ambit of the definition of connected person. For instance, if
a husband shares some information with his wife, and she does nothing to misuse
it, it would still, as per the new Regulations, be considered as a criminal offence.

ii) DUE DILIGENCE

The Regulations contain specific provisions for communication and procurement
of information for the purpose of conduct of due-diligence in connection with
substantial transactions including mergers and acquisitions. Thus, based on
whether or not a transaction entails making an open offer under Takeover Code,
information may be communicated, provided, allowed access to or procured as
long as the Board is of the informed opinion that the transaction is in the best
interest of the company and due diligence may be lawfully conducted. In case, a
particular transaction does not entail making an open offer to the public
shareholders, the Board of Directors would be required to cause public disclosures
of the UPSI prior to the proposed transaction to rule out any information
asymmetry in the market. Additionally, a duty has been cast on the company to
cause the parties to execute confidentiality and non-disclosure agreements for the
purpose of this provision.
Although, due-diligence was not specifically prohibited in the 1992 Regulations,
there was an ambiguity on whether as a part of the due diligence a company was
permitted to disclose UPSI. Thus, by the introduction of this provision has to a
large extent clarified that the communication or procurement of UPSI for the
purpose of due-diligence shall be permitted. Nonetheless, this situation leads to
the dilemma of the uncertain reaction of the market and consequences of causing
such public disclosures prior to the proposed transaction, in cases where an open
offer obligation is not triggered under the Takeover Code.
However, uncertainty may arise whether the company and the acquirer will be
charged for violation of the law if the deal does not go through.
iii) TRADING PLANS9
To facilitate compliant trading by insiders constantly in possession of UPSI, the
Regulations have introduced the concept of trading plans whereby every insider
is entitled to execute trades in pursuance of pre-determined trading plan which has

9
Regulation 5, SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS) 2015
 been approved by the compliance officer and has been publically disclosed six
months prior to commencement of such trading. This provision intends to give an
option to persons who may be perpetually in possession of UPSI and enabling
them to trade in securities in a compliant manner. This provision would enable
them the formulation of a trading plan by an insider to enable him to plan for
trades to be executed in future. By doing so, the possession of UPSI when a trade
under a trading plan is actually executed would not prohibit the execution of such
trades that he had pre-decided even before the UPSI came into being. Given that
once approved the trading plan becomes irrevocable, long term trading plans may
not be economically viable.
iv) DISCLOSURE OBLIGATIONS10
A key change introduced by the Regulations is that the provision relating to initial
and continual disclosures for persons holding more than 5% shares or voting
rights have been done away with. It is intended that the disclosure to be made by
any persons shall also include those relating to trading by such persons
immediate relatives and by any other person for whom such person takes trading
decisions, irrespective of whether the person has the title to the trades is in such
possession or not.
v) CODE OF FAIR DISCLOSURES AND CONDUCT11
The Board of every listed company is required to formulate and publish a code of
practices and procedures to be followed for fair disclosure of UPSI in accordance
with the principles set out in Schedule A to the Regulations, which set out certain
minimum standards. Further, the Board of Directors of every listed company and
market intermediary shall formulate a code of conduct to regulate, monitor and
report trading by its employees and other connected persons in accordance with
Schedule B to the Regulations. The Regulations also provide very other person
who is required to handle UPSI in the course of business operations such as
auditors, accountancy firms, law firms etc. are also required to formulate code of
conduct. Thus, those entities which operate outside capital market may be
required to formulate such a code depending on their exposure to UPSI.
vi) TRADING WINDOWS

10
Regulation 6&7, SEBI (PROHIBITION OF INSIDER TRADING REGULATIONS) 2015
11
Regulation 8&9 read with Schedule A &B, SEBI (Prohibition of Insider Trading Regulations) 2015
 Another important development is with regards to notional trading windows
which are used as an instrument to monitor compliant trading by designated
persons within a company. Further, this concept has been made applicable to
external agencies having contractual or fiduciary relation with the company. The
time-frame for such re-opening of trading windows has been set to 48 hours vis--
vis 24 hours under 1992 Regulations, after the UPSI becomes generally available.

CONCLUSION

With a view to do away with the lacunae and inadequacies of the 1992 Regulations, SEBI has
revamped the entire framework governing insider trading in India. In the 2015 Regulations,
the scope of who an insider or a connected person is, stands significantly widened.
Consequently, any person, whether or not related to the company, may come within the
purview of the Regulations if he is expected to have access or possess UPSI. Also, the
applicability of the Regulation has been extended to UPSI in relation to a company as well as
securities listed or proposed to be listed on a stock exchange. For the purpose of legitimate
business transactions, access to UPSI, for instance if due-diligence, with appropriate
safeguards has been explicitly provided for which shall avert the risk of any regulatory
scrutiny in relation to such transactions. SEBI has overhauled the entire framework for
regulation of insider trading, which is seen to be a deep rooted problem in India, with a view
to ensure a level-playing field in the securities market and to safeguard the interest of the
investors. This move by SEBI will provide a much needed flip to Indian capital market and
facilitate further economic buoyancy.